Download Securitisation rules in Singapore

Securitisation rules in Singapore
from Monetary Authority of Singapore
MAS 628
06 Sep 2000
NOTICE TO BANKS
BANKING ACT, CAP 19
ASSET SECURISATION BY BANKS
1
Definitions
In this Notice:
a. "ABS" refers to asset-backed securities;
b. "manager" refers to the bank that arranges and promotes a securitisation
transaction;
c. "MBS" refers to mortgage-backed securities;
d. "seller" refers to the bank that seeks to sell or otherwise transfer assets off its
balance sheet;
e. "servicer" refers to the agent that carries out certain administrative functions
relating to the securitisation transaction 1.
It may be a third party agent or the
seller performing this function in order to maintain customer relationships or
earn servicing fees; and
f. "SPV" refers to the special purpose vehicle or trust used as a vehicle in a
securitisation transaction.
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2
Introduction
2.1 Securitisation in its basic form is the process by which assets
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or interests in
assets are sold, or otherwise transferred, to a SPV, which is funded by the issue of
securities secured primarily by these assets.
2.2 Banks may undertake one or several roles in a securitisation transaction.
The
extent of a bank's participation may be limited to the provision of a particular service
(e.g. servicing, credit enhancement or liquidity facilities), or it may participate as
seller in securitisation transactions managed by independent parties.
Alternatively, a
bank may establish and manage its own securitisation transactions.
2.3 The senior management of a bank is responsible for the institution's participation
in securitisation transactions.
Banks should have clear strategies and approved
policies governing these activities, and there must be appropriate internal systems
and controls to identify, monitor and manage the various types of risk arising
out of their involvement in securitisation.
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Scope of Obligations
3.1 This Notice is issued pursuant to section 54A(1) of the Banking Act and applies
to all banks acting as seller, servicer, provider of credit enhancement or liquidity
facilities, manager or investor relating to any securitisation transaction.
3.2 The
comprehensive
application
of
this
Notice
to
branches
of
foreign-incorporated banks is not possible because provisions relating to capital
adequacy requirements cannot be applied directly.
In these cases, the treatment of
securitisation for capital adequacy purposes would be a matter for the home
supervisor of the entity concerned.
Nonetheless, branches of foreign-incorporated
banks in Singapore must observe the requirements relating to disclosure, separation
and, where applicable, any other conditions related to the provision of facilities and
services as set out in this Notice.
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Prior Approval from MAS
4.1 Any bank proposing to act as seller or manager, either solely or jointly with
other parties, in a securitisation transaction must seek prior approval from the
2
Authority.
Where a bank seeks to undertake a securitisation transaction using a
structure for which it had previously received approval from the Authority, only prior
notification is required.
4.2 Any bank with plans to participate in any securitisation transaction that raises
issues not covered in this Notice (e.g. revolving asset structures) should consult the
Authority well in advance.
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Supervisory Considerations
5.1 Whilst the Authority recognises the benefits of securitisation, these activities
raise important implications for the prudential supervision of banks.
As a result of
their involvement in securitisation transactions, banks will incur operational, legal
and/or other risks.
Banks may also feel pressured to support a securitisation
transaction, beyond any legal obligation, in order to protect its reputation.
5.2 Moreover, the securitisation of high quality assets may lead to
deterioration in the average quality of the seller's assets if funds received from
securitisation are reinvested in assets of a lower quality vis-à-vis the assets sold.
5.3 To ensure that banks conduct securitisation transactions in a prudent manner, the
Authority may impose supervisory limits on the volume or types of assets which may
be securitised.
The Authority may also raise the capital adequacy requirements of a
bank, where the totality of its activities suggests that its overall level or concentration
of risks has become excessive relative to its capital.
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General Requirements for All Banks Participating in Securitisation
Transactions
Disclosure Requirements
6.1 Any bank participating in a securitisation transaction must take reasonable steps
to disclose to investors the nature and extent of its contractual obligations in the
securitisation transaction.
For this purpose, banks must comply with the
requirements set out in Annex A to this Notice.
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Separation Requirements
6.2 In order to limit a bank's reputational risks with respect to a securitisation
transaction, there must be clear separation between the bank and the SPV.
For this
purpose, banks participating in a securitisation transaction must comply with the
requirements set out in Annex B to this Notice.
6.3 All transactions between the bank and the SPV must be conducted at arm's
length and on market terms and conditions.
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Requirements for Banks as Sellers
7.1 A seller will be relieved of the need to maintain capital in support of assets it has
transferred to the SPV where it has:
a. complied with the requirements in section 6;
b. complied with the requirements in Annex C to this Notice; and
c. confirmed in writing to the Authority that it has received written opinions
from its external auditors and legal advisors that the terms of the securitisation
transaction comply with the requirements mentioned in sections 7.1(a) and (b).
7.2 A seller may purchase senior securities issued by the SPV at market prices
for investment or hedging purposes.
Such purchases should not exceed 10 per
cent of the original amount of the issue.
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Requirements for Banks Providing Servicing, Credit Enhancement and/or
Liquidity Facilities
8.1 Banks may enter into agreements to provide servicing, credit enhancement
and/or liquidity facilities to a SPV.
In providing such facilities, banks should fully
understand the range of risks involved.
There should be effective systems in place to
ensure that all risks, including potential conflicts of interest, are identified and
properly managed, and that adequate capital as prescribed in this Notice is held
against such risks.
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8.2 Banks entering into agreements referred to in section 8.1, shall comply with:
a. the requirements in section 6; and
b. the applicable requirements in Annex D to this Notice.
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Requirements for Banks as Investors
9.1 Banks holding ABS have risk exposures to the underlying SPV assets.
These
should be taken into consideration when determining overall exposures to any
particular obligor, industry or geographic area for the purpose of managing
concentration risks.
9.2 For capital adequacy purposes, banks holding ABS shall treat them according to
the applicable risk weights prescribed by the Authority.
9.3 However, investment grade securities from a securitisation transaction
involving residential mortgages held in the banking book will be eligible for a 50
per cent risk-weight, where the following conditions are met:
a. the loans underlying the MBS must at the start of the securitisation transaction
be fully secured by mortgage on residential property;
b. the mortgage loans must not be classified (in accordance to MAS Notice 612)
at the time at which they are transferred to the SPV;
c. the activities of the SPV are restricted to solely that of issuing securities and it
may only hold assets qualifying for risk-weight of 50 per cent or less; and
d. the documentation for MBS qualifying for 50 per cent risk-weight must not
provide that the investors in such MBS will absorb more than their pro-rata
share of losses in the event of arrears or default on payment of interest on, or
principal of, the underlying mortgage loans.
9.4 Banks may purchase non-investment grade ABS in a multi-class issue for
investment purposes. However, where the Authority regards such purchase as a form
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of credit enhancement to the SPV, the bank will be required to deduct the purchase
from its capital base.
10
Policy Review
10.1 The Authority will continually monitor market developments and review its
policy as and when necessary to ensure the prudent conduct of securitisation
transactions by banks.
Annex A
Annex B
Annex C
Annex D
1
The primary responsibility of the servicer is to set up and operate the mechanism for
collecting payments of interest or principal deriving from the underlying assets, and
channelling these funds to the investors or the trustee representing them. Other
functions include customer service, cash management, maintenance of records, and
reporting duties.
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Examples of such assets include loans, leases or other receivables.
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